UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File No. 1-14473
Sky Financial Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Ohio 34-1372535
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
221 South Church Street, Bowling Green, Ohio 43402
(Address of Principal Executive Offices) (Zip Code)
(419) 327-6300
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the Registrant's common stock, without par
value was 82,428,519 at April 30, 2002.
SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 ................... 3
Consolidated Statements of Income
Three months ended March 31, 2002 and 2001 ............. 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity
Three months ended March 31, 2002 and 2001 ............. 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001 ............. 6
Notes to Consolidated Financial Statements ............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 23
Item 2. Changes in Securities and Use of Proceeds ................ 23
Item 3. Defaults Upon Senior Securities .......................... 23
Item 4. Submission of Matters to a Vote of Security Holders ...... 23
Item 5. Other Information ........................................ 24
Item 6. Exhibits and Reports on Form 8-K ......................... 24
SIGNATURES ......................................................... 24
EXHIBIT INDEX ...................................................... 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKY FINANCIAL GROUP, INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data) March 31, December 31,
2002 2001
- ----------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 231,718 $ 272,196
Interest-earning deposits
with financial institutions 29,121 39,171
Federal funds sold -- 8,000
Loans held for sale 30,857 85,474
Securities available for sale 2,199,226 1,996,843
Total loans 6,596,370 6,473,989
Less allowance for credit losses (105,341) (103,523)
---------- -----------
Net loans 6,491,029 6,370,466
Premises and equipment 111,747 112,137
Accrued interest receivable and other assets 366,948 335,941
---------- ----------
TOTAL ASSETS $9,460,646 $9,220,228
========== ==========
LIABILITIES
Deposits
Non-interest-bearing deposits $ 801,975 $ 822,436
Interest-bearing deposits 6,015,604 5,719,741
---------- ----------
Total deposits 6,817,579 6,542,177
Securities sold under repurchase
agreements and federal funds purchased 727,653 685,450
Debt and Federal Home Loan Bank advances 1,020,844 1,095,545
Obligated mandatorily redeemable capital
securities of subsidiary trusts 107,744 108,600
Accrued interest payable
and other liabilities 115,655 140,012
---------- ----------
TOTAL LIABILITIES 8,789,475 8,571,784
---------- ----------
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value;
10,000,000 shares authorized; none issued -- --
Common stock, no par value;
150,000,000 shares authorized;
83,988,472 and 84,011,214 shares
issued in 2002 and 2001 597,742 596,397
Retained earnings 101,649 86,113
Treasury stock; 1,334,376 and
2,164,099 shares in 2002 and 2001 (29,187) (39,505)
Unearned ESOP (123) (123)
Accumulated other comprehensive income 1,090 5,562
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 671,171 648,444
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $9,460,646 $9,220,228
========== ==========
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, Three Months Ended
except per share data) March 31,
2002 2001
- ------------------------------------------------------------
Interest Income
Loans, including fees $120,810 $132,276
Securities
Taxable 29,276 29,230
Nontaxable 386 544
Federal funds sold and other 1,127 659
-------- --------
Total interest income 151,599 162,709
-------- --------
Interest Expense
Deposits 46,351 60,275
Borrowed funds 21,272 25,657
-------- --------
Total interest expense 67,623 85,932
-------- --------
Net Interest Income 83,976 76,777
Provision for Credit Losses 9,321 6,656
-------- --------
Net Interest Income After
Provision for Credit Losses 74,655 70,121
-------- --------
Non-Interest Income
Trust services income 3,453 3,706
Service charges and fees on
deposit accounts 7,610 6,909
Mortgage banking income 5,453 4,652
Brokerage and insurance commissions 8,732 8,774
Net securities gains 505 925
Other income 7,070 7,205
-------- --------
Total other income 32,823 32,171
-------- --------
Non-Interest Expense
Salaries and employee benefits 34,747 31,205
Occupancy and equipment expense 8,829 9,217
Other operating expense 16,955 18,817
-------- --------
Total other expenses 60,531 59,239
-------- --------
Income Before Income Taxes 46,947 43,053
Income taxes 15,460 14,216
-------- --------
Net Income $ 31,487 $ 28,837
======== ========
Earnings Per Common Share
Basic $ 0.38 $ 0.35
Diluted $ 0.38 $ 0.35
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(Dollars in thousands, Three Months Ended
except per share data) March 31,
2002 2001
- ------------------------------------------------------------
Balance at beginning of period $648,444 $609,690
Comprehensive income
Net income 31,487 28,837
Other comprehensive income (loss) (4,832) 7,382
--------- --------
Total comprehensive income 26,655 36,219
Common cash dividends (15,704) (14,982)
Treasury shares acquired (5,968) (8,781)
Treasury shares issued 1,444 754
Shares issued to acquire Celaris
Group, Inc. 15,349
Fractional shares and other items 951 (454)
-------- --------
Balance at end of period $671,171 $622,446
======== ========
Common cash dividends per share $ 0.19 $ 0.18
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
(Dollars in thousands) March 31,
2002 2001
- ----------------------------------------------------------------------
Net Cash From Operating Activities $59,592 $ 3,985
------- ---------
Investing Activities
Net (increase) decrease in interest-bearing
deposits in other banks 10,050 (109)
Net (increase) decrease in federal funds sold 8,000 (107,000)
Securities available for sale:
Proceeds from maturities and payments 73,380 227,865
Proceeds from sales 260,175 42,381
Purchases (540,914) (180,968)
Proceeds from sales of loans 2,894 2,351
Net increase in loans (131,894) (73,903)
Purchases of premises and equipment (3,316) (2,896)
Proceeds from sales of premises and equipment 232 1,618
Proceeds from sales of other real estate 503 550
Cash paid to acquire Celaris Group, Inc. (1,000) -
--------- ----------
Net cash from investing activities (321,890) (90,111)
--------- --------
Financing Activities
Net increase in deposit accounts 275,402 165,164
Net increase (decrease) in federal funds
and repurchase agreements 42,203 13,048
Net increase (decrease) in borrowings
under bank lines of credit 83,806 7,105
Net decrease in short-term FHLB advances (140,000) (132,000)
Proceeds from issuance of debt
and long-term FHLB advances 75,797 84,495
Repayment of debt and long-term
FHLB advances (95,160) (67,804)
Cash dividends and fractional shares paid (15,704) (15,051)
Proceeds from issuance of common stock 1,444 754
Treasury stock purchases (5,968) (8,781)
-------- ----------
Net cash from financing activities 221,820 46,930
-------- ----------
Net decrease in cash and due from banks (40,478) (39,196)
Cash and due from banks at beginning of year 272,196 266,359
-------- ---------
Cash and due from banks at end of period $231,718 $227,163
======== =========
Supplemental Disclosures
Interest paid $ 69,097 $ 83,047
Income taxes paid 13,900 2,082
Noncash transactions - common shares issued
to acquire Celaris Group, Inc. 15,349
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Notes to Consolidated Financial Information (Unaudited)
(Dollars in thousands, except per share data)
1. Accounting Policies
Sky Financial Group, Inc. (Sky Financial) is a financial holding company
headquartered in Bowling Green, Ohio that owns and operates Sky Bank which is
primarily engaged in the commercial and consumer banking business in Ohio,
southern Michigan, western Pennsylvania and West Virginia. Sky Financial also
operates businesses relating to commercial finance lending, insurance, trust and
other related financial services.
The accounting and reporting policies followed by Sky Financial conform to
accounting principles generally accepted in the United States of America (US
GAAP) and to general practices within the financial services industry. The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Actual results could differ from those
estimates. The allowance for credit losses and fair values of financial
instruments are particularly subject to change.
These interim financial statements are prepared without audit and reflect all
accruals of a normal recurring nature which, in the opinion of management, are
necessary to present fairly the consolidated financial position of Sky Financial
at March 31, 2002, and its results of operations and cash flows for the periods
presented. Certain amounts in prior financial statements have been reclassified
to conform to the current presentation. The accompanying consolidated financial
statements do not contain all financial disclosures required by US GAAP. Sky
Financial's Annual Report for the year ended December 31, 2001, contains
consolidated financial statements and related notes which should be read in
conjunction with the accompanying consolidated financial statements.
The consolidated financial statements of Sky Financial include the accounts of
Sky Bank, Sky Financial Solutions, Inc. (SFS), Sky Trust, N.A., (Sky Trust),
Picton Cavanaugh, Inc. (Picton), Meyer & Eckenrode Insurance Group, Inc. (Meyer
& Eckenrode), Celaris Group, Inc. (Celaris) and various other insignificant
subsidiaries. All significant intercompany transactions and accounts have been
eliminated in consolidation.
New Accounting Pronouncements
Effective January 1, 2002, new accounting guidance changed post-acquisition
accounting for goodwill and certain intangible assets by discontinuing the
amortization of these assets and requiring impairment testing at least annually.
Sky Financial is performing the initial impairment test required by the new
guidance and believes that goodwill recorded at January 1, 2002 is not
considered impaired. Adoption of the standard did result in lower amortization
expense of
$450 for the three months ended March 31, 2002 as compared to the same period in
the previous year and had no impact on earnings per share for the quarter ended
March 31, 2002.
2. Mergers, Acquisitions and Divestitures
In May 2002, Sky Financial announced an agreement to acquire Three Rivers
Bancorp, a $1 billion bank holding company located in Monroeville, Pennsylvania
and its wholly-owned subsidiary, Three Rivers Bank and Trust Company
(collectively known as Three Rivers). The acquisition will be settled through an
exchange of Sky Financial stock and cash to Three Rivers shareholders and is
anticipated to close during the fourth quarter of 2002.
In April 2002, Sky Financial acquired Value Added Benefits, Ltd., a wholesale
insurance agency headquartered in Cleveland, Ohio, for $1.9 million.
In January 2002, Sky Financial completed the acquisition of Celaris, Group,
Inc., a full service insurance agency headquartered in Bowling Green, Ohio. In
connection with the acquisition, Sky Financial paid $1 million in cash and
issued .75 million shares of Sky Financial stock.
In September 2001, Sky Financial acquired Barney C. Guttman and Associates,
Inc., an investment management and financial services firm for $.6 million in
cash.
In October 2001, Sky Financial completed its purchase of ten branch offices from
Standard Federal Bank of Troy, Michigan. In connection with the acquisition, Sky
Bank assumed approximately $290,000 of deposit liabilities, while Standard
Federal Bank retained substantially all loans associated with the branches.
In March 2001, Sky Financial completed the sale of Sky Investments, Inc., its
independent broker/dealer business. The sale resulted in a $634 pre-tax gain.
3. Securities Available for Sale
The amortized costs, unrealized gains and losses and estimated fair values at
March 31, 2002 and December 31, 2001 are as follows:
Estimated Gross Gross
Fair Unrealized Unrealized
March 31, 2002 Value Gains Losses
- ---------------------------------------------------------------
U.S. Treasury and U.S.
Government agencies $ 492,161 $ 6,704 $ (1,496)
Obligations of states and
political subdivisions 32,768 231 (224)
Corporate and other
securities 68,539 621 (2,409)
Mortgage-backed
securities 1,486,071 12,530 (13,250)
---------- ---------- ----------
Total debt securities
available for sale 2,079,539 20,086 (17,379)
Marketable equity
securities 119,687 9,470 (3,639)
----------- ---------- -----------
Total securities
available for sale $ 2,199,226 $ 29,556 $ (21,018)
=========== ========== ===========
December 31, 2001
- -----------------
U.S. Treasury and U.S.
Government agencies $ 494,474 $ 11,717 $ (9)
Obligations of states and
political subdivisions 32,912 255 (311)
Corporate and other
securities 75,744 527 (2,864)
Mortgage-backed
securities 1,279,227 12,706 (8,044)
------------------------------------
Total debt securities
available for sale 1,882,357 25,205 (11,228)
Marketable equity
securities 114,486 7,903 (4,392)
------------------------------------
Total securities
available for sale $1,996,843 $ 33,108 $(15,620)
====================================
4. Loans
The loan portfolios are as follows:
March 31, 2002 December 31, 2001
- ---------------------------------------------------------------------------
Real estate loans:
Construction $ 210,269 $ 295,154
Residential mortgage 1,508,246 1,675,957
Non-residential mortgage 1,809,854 1,719,074
Commercial, financial and
agricultural 2,237,637 2,127,045
Installment and credit card loans 811,837 638,958
Other loans 18,527 17,801
---------- ----------
Total loans $6,596,370 $6,473,989
========== ==========
5. Borrowings
Sky Financial's debt, Federal Home Loan Bank (FHLB) advances and obligated
mandatorily redeemable capital securities of subsidiary trusts are comprised of
the following:
March 31, 2002 December 31, 2001
- ---------------------------------------------------------------------------
Borrowings under bank lines of credit $ 172,967 $ 89,161
Asset backed notes
2001-A, Class A-1, due December 2011
at 6.425% 34,769 36,155
2001-A, Class A-2, due December 2011
at 9.95% 45,000 45,000
2001-B, Class A-1, due July 2012
at 5.55% 52,159 54,215
2001-B, Class A-2, due July 2012
at 6.39% 49,760 49,760
2001-C, Class A-1. due January 2013
at 4.555% 32,795 33,000
2001-C, Class A-2, due January 2013
at 5.925% 72,000 72,000
Borrowings under FHLB lines of credit 507,053 662,216
Subordinated note, 7.08%, January 2008 50,000 50,000
Obligated mandatorily redeemable capital
securities of subsidiary trusts
Due February 2027 at 9.875% 24,144 25,000
Due June 2027 at 10.20% 23,600 23,600
Due May 2030 at 9.34% 60,000 60,000
Capital lease obligations 1,496 1,496
Other items 2,845 2,542
----------- ----------
Total borrowings $1,128,588 $1,204,145
=========== ==========
SFS's warehouse line of credit is included under bank lines of credit and was
$92,102 at March 31, 2002 as compared to $19,161 at December 31, 2001. Sky
Financial has entered into amortizing interest rate swaps, whereby it pays a
fixed rate of interest and receives a variable rate. The swap is designed to fix
the rate on the borrowings of the warehouse line that is used to fund the loan
originations at SFS. The swap, which had a fair market value of $914 at March
31, 2002, has been designated as a cash flow hedge and is considered to be
highly effective. Accordingly, any change in market value is recorded in other
comprehensive income.
During March 2002, Sky Financial entered into interest rate swap arrangements to
fix the rate of borrowings on $35,000 of the 9.34% trust preferred security due
May 2030 and $25,000 of the 9.875% trust preferred security due February 2027 in
exchange for variable rates payments based on LIBOR plus a spread as defined in
the agreement. At March 31, 2002, the swaps had a market value of $856. The
interest rate swaps involve no exchange of principal either at inception or
maturity and have maturities and call options identical to the trust preferred
security agreements. The arrangements have been designated as fair value hedges
and both the change in the fair value of the hedges and the hedged transactions
are reflective in earnings.
The expected final payment dates for the asset backed notes listed above are
included in the following table:
Stated Expected Final
Maturity Date Payment Date
- --------------------------------------------------------------------
2001-A, Class A-1 December 2011 October 2005
2001-A, Class A-2 December 2011 July 2009
2001-B, Class A-1 July 2012 July 2005
2001-B, Class A-2 July 2012 April 2007
2001-C, Class A-1 January 2013 October 2005
2001-C, Class A-2 January 2013 August 2010
6. Other Comprehensive Income
Other comprehensive income consisted of the following:
Three Months Ended
March 31,
2002 2001
- ------------------------------------------------------------------------
Securities available for sale:
Unrealized securities gain (loss)
arising during period $(8,445) $15,943
Reclassification adjustment for
(gains) losses included in income (505) (925)
--------- -------
(8,950) 15,018
--------- -------
Cash flow hedge derivatives:
Adjustment for adoption of SFAS No. 133 (1,231)
Amounts reclassified to interest expense 530 431
Change in fair value of cash flow
hedge derivatives 986 (2,862)
-------- --------
1,516 (3,662)
-------- --------
Net unrealized gain (loss) (7,434) 11,356
Tax effect 2,602 (3,974)
-------- --------
Total other comprehensive income (loss) $ (4,832) $ 7,382
======== ========
7. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period, as restated for stock
dividends. Diluted earnings per share is computed using the weighted average
number of shares determined for the basic computation plus the dilutive effect
of potential common shares issuable under stock options. For the three months
ended March 31, 2002 and 2001, 1,128,000 and 2,261,000 weighted shares,
respectively, under option were excluded from the diluted earnings per share
calculation as they were anti-dilutive.
The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
Three Months Ended
March 31,
2002 2001
- --------------------------------------------------------------
Numerator:
Net income $31,487 $28,837
======= =======
Denominator:
Weighted-average common
shares outstanding (basic) 82,326,000 83,144,000
Effect of stock options 725,000 421,000
---------- ----------
Weighted-average common
shares outstanding (diluted) 83,051,000 83,565,000
========== ==========
Earnings per share:
Basic $ 0.38 $ 0.35
Diluted 0.38 0.35
8. Capital Resources
The Federal Reserve Board (FRB) has established risk-based capital guidelines
that must be observed by financial holding companies and banks. Failure to meet
specified minimum capital requirements can result in certain mandatory actions
by primary regulators of Sky Financial and its bank subsidiaries that could have
a material effect on Sky Financial's financial condition or results of
operations. Under capital adequacy guidelines, Sky Financial and its bank
subsidiaries must meet specific quantitative measures of their assets,
liabilities and certain off balance sheet items as determined under regulatory
accounting practices. Sky Financial's and its banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Management believes, as of March
31, 2002, that Sky Financial and its banks meet all capital adequacy
requirements to which they are subject.
Sky Financial and its banks have been notified by their respective regulators
that, as of the most recent regulatory examinations, each is regarded as well
capitalized under the regulatory framework for prompt corrective action. Such
determinations have been made evaluating Sky Financial and its banks under Tier
I, total capital, and leverage ratios. There are no conditions or events since
these notifications that management believes have changed any of the well
capitalized categorizations of Sky Financial and its bank subsidiaries.
The following table presents the capital ratios of Sky Financial.
March 31, 2002 December 31, 2001
- ----------------------------------------------------------------------------
Total adjusted average assets
for leverage ratio $9,235,629 $9,052,525
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 7,621,796 7,329,032
Tier I capital 700,541 684,685
Total risk-based capital 849,494 830,000
Leverage ratio 7.6% 7.6%
Tier I capital ratio 9.2 9.3
Total capital ratio 11.1 11.3
Capital ratios applicable to Sky Financial's banking subsidiary at March 31,
2002 were as follows:
Total
Tier I Risk-based
Leverage Capital Capital
- --------------------------------------------------------------------
Regulatory Capital Requirements
Minimum 4.0% 4.0% 8.0%
Well-capitalized 5.0 6.0 10.0
Sky Financial 7.6 9.2 11.1
Sky Bank 6.4 8.3 10.7
In September, 2001, the Board of Directors of Sky Financial reauthorized
management to undertake purchases of up to an additional 2.5% (or approximately
2 million shares) of Sky Financial's outstanding common stock over a twelve
month period in the open market or in privately negotiated transactions. The
shares reacquired are held as treasury stock and reserved for use in future
stock dividends and use in its stock option plans or general corporate purposes.
As of March 31, 2002, Sky Financial had repurchased approximately 280,000 shares
of common stock pursuant to its 2001 repurchase program.
9. Line of Business Reporting
Sky Financial manages and operates three major lines of business: community
banking, financial services affiliates and Sky Financial Solutions. Community
banking includes lending and related services to businesses and consumers,
mortgage banking and deposit-gathering. Commercial finance lending includes
specialized lending to health care professionals, primarily dentists. Other
financial service affiliates consist of non-banking companies engaged in
broker/dealer operations, non-conforming mortgage lending, trust and wealth
management, insurance and other financial-related services.
The reported line of business results reflect the underlying core operating
performance within the business units. Parent and Other is comprised of the
parent company and several smaller business units. It includes the net funding
cost of the parent company and intercompany eliminations. Expenses for centrally
provided services and support are fully allocated based principally upon
estimated usage of services. All significant non-recurring items of income and
expense company-wide are included in Parent and Other. Prior periods have been
presented to conform with current reporting methodologies. Substantially all of
Sky Financial's assets are part of the community banking line of business.
Selected segment information for the three months ended March 31, 2002 and 2001
is included in the following tables:
Financial Sky Parent
Three Months Ended Community Service Financial and
March 31, 2002 Banking Affiliates Solutions Other Total
- ----------------------------------------------------------------------------
Net interest income $81,648 $ 245 $ 3,628 $(1,545) $83,976
Provision for
credit losses 8,005 180 1,136 -- 9,321
------- ------- ------- ------- -------
Net interest income
after provision 73,643 65 2,492 (1,545) 74,655
Other income 20,099 8,895 723 3,106 32,823
Other expenses 48,186 7,132 5,341 (128) 60,531
------- ------- ------- ------ -------
Income (loss) before
income taxes 45,556 1,828 (2,126) 1,689 46,947
Income taxes 15,067 713 (743) 423 15,460
------- ------- ------- ------- -------
Net income (loss) $30,489 $ 1,115 $(1,383) $ 1,266 $31,487
======= ======= ======= ======= =======
Average assets $8,733,015 $74,935 $397,334 $ 81,304 $9,286,588
Depreciation and
Amortization $ 3,216 $ 136 $ 145 $ 1,187 $ 4,684
Financial Sky Parent
Three Months Ended Community Service Financial and
March 31, 2001 Banking Affiliates Solutions Other Total
- ----------------------------------------------------------------------------
Net interest income $76,408 $ 385 $ 1,224 $(1,240) $76,777
Provision for
credit losses 5,071 150 1,435 -- 6,656
------- ------- ------- ------- -------
Net interest income
after provision 71,337 235 (211) (1,240) 70,121
Other income 17,645 12,552 556 1,418 32,171
Other expenses 44,585 10,650 3,675 329 59,239
------- ------- ------- -------- -------
Income (loss) before
income taxes 44,397 2,137 (3,330) (151) 43,053
Income taxes 14,733 899 (1,187) (229) 14,216
------- ------ ------- ------- -------
Net income (loss) $29,664 $ 1,238 $(2,143) $ 78 $28,837
======= ======= ======= ======= =======
Average assets $8,042,973 $48,232 $149,300 $125,623 $8,366,128
Depreciation and
amortization $ 3,005 $ 377 $ 142 $ 1,152 $ 4,676
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended March 31, 2002 and 2001
Results of Operations
Net income for the first quarter of 2002 was $31,487, an increase of $2,650 over
the first quarter of 2001 net income of $28,837. Diluted earnings per common
share for the first quarter of 2001 was $.38 ($.38 basic), as compared to $.35
($.35 basic) for the same period in 2001. Diluted operating earnings per share
was $.38 ($.38 basic) for the first quarter of 2002 as compared to $.34 ($.34
basic) for the first quarter of 2001. First quarter 2001 results include the
sale of its independent broker/dealer business realizing an after-tax
non-recurring gain of $412. Return on average equity (ROE) and return on average
assets (ROA) were 18.98% and 1.38%, respectively, for the first quarter of 2002,
compared to 18.79% and 1.38%, respectively, in 2001.
Business Line Results
Sky Financial's business line results for the first quarter ended March 31, 2002
and 2001 are summarized in the table below.
Net Income (Loss)
Quarter Ended March 31, 2002 2001
- --------------------------------------------------------------
Community Banking $30,489 $ 29,664
Financial Service Affiliates 1,115 1,238
Sky Financial Solutions, Inc. (1,383) (2,143)
Parent and Other 1,266 78
-------- --------
Consolidated Total $ 31,487 $ 28,837
======== ========
The community banking net income increased in the first quarter of 2002 as
compared to the same period of the previous year due to increased net interest
income and mortgage banking income. These increases were offset by a higher
provision for loan losses and an increase in other expenses. The efficiency
ratio was 46.96% for the first quarter of 2002 compared to 46.97% in the first
quarter of 2001. The 2002 community banking results reflect a ROE of 19.39% and
a ROA of 1.42% compared to 21.34% and 1.50%, respectively, in the first quarter
of 2001.
Sky Financial Solutions' loss decreased for the first quarter of 2002 as
compared to the same period in 2001 due to increased interest income as a result
of the continued growth in its retained loan portfolio.
The financial service affiliates' net income decreased slightly as compared to
2001 as a result of a decline in net income at the company's trust operations.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense.
Net Interest Income
Net interest income for the first quarter of 2002 was $83,976, an increase of
$7,199 or 9% from $76,777 in the first quarter of 2001. Net interest income, the
difference between interest income earned on interest-earning assets and
interest expense incurred on interest-bearing liabilities, is the most
significant component of the Company's earnings. Net interest income is affected
by changes in the volumes, rates and composition of interest-earning assets and
interest-bearing liabilities. Average earning assets increased 11.4% from the
first quarter last year, with strong growth in average loans, increasing 9.8%
from last year. Average deposits were up 12.8% from the same quarter last year.
Sky Financial's net interest margin for the three months ended March 31, 2002
was 3.95%, a decrease of 8 basis points from first quarter a year ago. The lower
net interest margin reflects the impact of the initial lower spread earned on
branch deposits acquired during the fourth quarter 2002.
The following table reflects the components of Sky Financial's net interest
income for the three months ended March 31, 2002 and 2001. Rates are computed on
a tax equivalent basis and non-accrual loans have been included in the average
balances.
SKY FINANCIAL GROUP, INC.
Average Balance Sheets and Net Interest Margins (Unaudited)
(Dollars in thousands) Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
- -----------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning deposits $ 29,029 $ 142 1.98% $ 15,457 $ 236 6.19%
Federal funds sold and other 17,051 66 1.57 31,088 423 5.52
Securities 2,099,903 29,959 5.79 1,794,868 30,185 6.82
Loans 6,564,696 122,302 7.56 5,976,722 132,772 9.01
---------- -------- ---------- --------
Total interest-earning assets 8,710,679 152,469 7.10 7,818,135 163,616 8.49
-------- --------
Non-earning assets 575,909 547,993
---------- ----------
Total assets $9,286,588 $8,366,128
========== ==========
Interest-bearing liabilities
Demand deposits $ 111,363 $ 248 90% $ 140,553 $ 928 2.68%
Savings and time deposits 5,783,974 46,103 3.13 5,064,424 59,347 4.75
---------- -------- ---------- --------
Total interest-bearing deposits 5,895,337 46,351 3.19 5,204,977 60,275 4.70
Short-term borrowings 695,486 6,806 3.97 697,364 8,660 5.04
Trust preferred securities 108,600 2,383 8.90 108,600 2,586 9.66
Debt and FHLB advances 1,013,657 12,083 4.83 880,858 14,411 6.63
---------- -------- ---------- --------
Total interest-bearing liabilities 7,713,080 67,623 3.56 6,891,799 85,932 5.06
-------- --------
Non-interest-bearing liabilities 900,698 860,976
Shareholders' equity 672,810 613,353
---------- ----------
Total liabilities and equity $9,286,588 $8,366,128
========== ==========
Net interest income, fully
taxable equivalent and
Net interest spread $ 84,846 3.54% $ 77,684 3.43%
======== ========
Net interest income, fully
taxable equivalent to
earning assets 3.95% 4.03%
Provision for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in Sky Financial's
loan portfolio which have been incurred at each balance sheet date. The
provision for credit losses increased $2,665 or 40% to $9,321 in the first
quarter of 2002 compared to $6,656 in the first quarter of 2001. The higher
provision for credit losses in the first quarter of 2002 was attributable to
growth in the loan portfolio and higher net charge-offs due to overall market
conditions. Net charge-offs were $7,504 or 0.46% (annualized) of average loans
during the three months ended March 31, 2002, compared to $4,259 or 0.29%
(annualized) for the same period in 2001.
March 31, December 31, March 31,
2002 2001 2001
- ------------------------------------------------------------------------
Allowance for credit losses
as a percentage of loans 1.60% 1.60% 1.60%
Allowance for credit losses
as a percentage of
non-performing loans 282.51 303.55 344.25
Non-Interest Income
The change in non-interest income reflects the emphasis of Sky Financial on
expanding its profitable fee-based businesses and divesting its under-performing
businesses. Non-interest income for the first quarter of 2002 was $32,823, an
increase of $652 or 2% from the $32,171 for the same quarter of 2001.
Non-interest income growth was most significant in mortgage banking income, up
$801 or 17%, due to increases in origination volumes in the favorable interest
rate environment as compared to the first quarter of 2001. In addition, the
first quarter of 2002 included increased insurance commissions of $3,170 from
the acquisition of Celaris. These increases were partially offset by a decrease
of $2,335 in commission revenue from the company's broker/dealer business, which
was sold during the first quarter of 2001 resulting in a $412 after tax gain.
Non-Interest Expense
Non-interest expense for the first quarter of 2002 was $60,531, an increase of
$1,292 or 2%, from the $59,239 reported for the same quarter of 2001 due
primarily to the increase in salary and other employee costs as a result of the
Celaris acquisition. The efficiency ratio was 51.44% for the first quarter of
2002, down from 54.24% for the same quarter last year. As a result of a new
company wide technology platform implementation, Sky expects to incur after-tax
non-recurring expenses of $3 to $4 million, or approximately $.04 to $.05 per
diluted share during the second quarter of 2002.
Income Taxes
The provision for income taxes for the first quarter of 2002 increased
$1,244 to $115,460 from $14,216 for the same period in 2001. The effective tax
rate for the three months ended March 31, 2002 was 32.9% as compared to 33.0%
for the same period in 2001.
Balance Sheet
At March 31, 2002, total assets were $9,460,646, an increase of $240,418
from December 31, 2001. The increase was primarily attributable to an increase
in securities available for sale of $202,383, and an increase in loans of
$122,381 to $6,596,370 at March 31, 2002. These increases were partially offset
by a decrease in loans held for sale of $54,617 and a decrease in cash and due
from banks of $40,478. The net growth in assets was funded primarily by growth
in total deposits, up $275,402, partially offset by a decrease in borrowed funds
of $57,711. Shareholders' equity totaled $671,171 at March 31, 2002, increasing
$22,727 from December 31, 2001. Net retained earnings (net income less cash
dividends) for the three months ended March 31, 2002 totaled $15,783. Treasury
shares decreased $10,822, which consisted of issuances for the acquisition of
Celaris and for exercises under the stock option plans, offset by the repurchase
of common shares, as authorized by the Board of Directors. These changes were
offset by a decrease in other comprehensive income of $4,472, primarily due to
the change in market value of securities available for sale (see Condensed
Consolidated Statement of Changes in Shareholders' Equity and Note 8).
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets and
respective ratios on the dates indicated.
March 31, December 31, March 31,
2002 2001 2001
- -------------------------------------------------------------------------
Non-accrual loans $33,447 $33,319 $26,697
Restructured loans 3,840 785 1,090
------- ------- -------
Total non-performing loans 37,287 34,104 27,787
Other real estate owned 3,575 2,467 2,164
------- ------- -------
Total non-performing assets $40,862 $36,571 $29,951
======= ======= =======
Loans 90 days or more past due
and not on non-accrual $ 9,980 $15,902 $ 7,099
Non-performing loans to
total loans 0.57% 0.53% 0.46%
Non-performing assets to
total loans plus other
real estate owned 0.62 0.56 0.50
Allowance for credit losses to
total non-performing loans 282.51 303.55 344.25
Loans 90 days or more past due
and not on non-accrual to
total loans 0.15 0.25 0.15
Loans now current but where some concerns exist as to the ability of the
borrower to comply with present loan repayment terms, excluding
non-performing loans, approximated $47,675 and $45,516 at March 31, 2002 and
December 31, 2001, respectively, and are being closely monitored by management
and the Boards of Directors of the subsidiaries. The classification of these
loans, however, does not imply that management expects losses on each of these
loans, but believes that a higher level of scrutiny is prudent under the
circumstances. These loans require close monitoring despite the fact that they
are performing according to their terms. Such classifications relate to specific
concerns relating to each individual borrower and do not relate to any
concentrated risk elements common to all loans in this group.
As of March 31, 2002, Sky Financial did not have any loan concentrations which
exceeded 10% of total loans.
Allowance for Credit Losses
The following table presents a summary of Sky Financial's credit loss experience
for the three months ended March 31, 2002 and 2001.
Three Months Ended
March 31,
2002 2001
- -------------------------------------------------------------------------
Balance of allowance at beginning of year $103,523 $93,261
Loans charged-off:
Real estate (2,150) (410)
Commercial and agricultural (1,657) (2,515)
Installment and credit card (5,247) (3,365)
Other loans (138) --
--------- -------
Total loans charged-off (9,192) (6,290)
--------- -------
Recoveries:
Real estate 140 224
Commercial and agricultural 198 735
Installment and credit card 1,351 1,059
Other loans -- 13
-------- -------
Total recoveries 1,689 2,031
-------- -------
Net loans charged-off (7,503) (4,259)
Provision charged to operating expense 9,321 6,656
-------- -------
Balance of allowance at end of period $105,341 $95,658
======== =======
Ratio of net charge-offs to
average loans outstanding 0.46% 0.29%
Allowance for credit losses
to total loans 1.60 1.60
Allowance for credit losses
to total non-performing loans 282.51 344.25
Sky Financial maintains an allowance for credit losses at a level adequate to
absorb management's estimate of probable losses inherent in the loan portfolio.
The allowance is comprised of a general allowance, a specific allowance for
identified problem loans and an unallocated allowance.
The general allowance is determined by applying estimated loss factors to the
credit exposures from outstanding loans. For construction, commercial and
commercial real estate loans, loss factors are applied based on internal risk
grades of these loans. For residential real estate, installment, credit card and
other loans, loss factors are applied on a portfolio basis. Loss factors are
based on peer and industry loss data compared to Sky Financial's historical loss
experience, and are reviewed for revision on a quarterly basis, along with other
factors affecting the collectibility of the loan portfolio.
Specific allowances are established for all criticized and classified loans,
where management has determined that, due to identified significant conditions,
the probability that a loss has been incurred exceeds the general allowance loss
factor determination for those loans.
The unallocated allowance recognizes the estimation risk associated with the
allocated general and specific allowances and incorporates management's
evaluation of existing conditions that are not included in the allocated
allowance determinations. These conditions are reviewed quarterly by management
and include general economic conditions, credit quality trends, and internal
loan review and regulatory examination findings.
The following table sets forth Sky Financial's allocation of the allowance for
credit losses as of March 31, 2002 and December 31, 2001.
March 31, 2002 December 31, 2001
- ---------------------------------------------------------------------
Construction $ 2,502 $ 2,387
Real estate 30,670 29,332
Commercial, financial
and agricultural 37,040 33,468
Installment and credit card 23,231 25,756
Other loans 109 1,099
Unallocated 11,789 11,481
-------- --------
Total $105,341 $103,523
======== ========
Liquidity
- ---------
Management of liquidity is of growing importance to the banking industry. The
liquidity of a financial institution reflects its ability to meet loan requests,
to accommodate possible outflows in deposits and to take advantage of interest
rate market opportunities. The ability of a financial institution to meet its
current financial obligations is a function of balance sheet structure, the
ability to liquidate assets, and the availability of alternative sources of
funds.
In addition to maintaining a stable core deposit base, Sky Financial's banking
subsidiary maintains adequate liquidity primarily through the use of investment
securities and unused borrowing capacity. At March 31, 2002, securities and
other short term investments with maturities of one year or
less totaled $24,111. In addition, the mortgage-backed securities provide an
estimated cash flow of approximately $297,113 over a twelve-month timeframe. The
banking subsidiary is a member of the Federal Home Loan Bank (FHLB). The FHLB
provides a reliable source of funds over and above retail deposits. As of March
31, 2002, the banking subsidiary had total credit availability with the FHLB of
$757,696, of which $507,053 was outstanding.
Sky Financial, through one of its affiliates, entered into a conduit warehousing
facility with a financial institution to provide up to $125,000 of interim
funding for loans originated by SFS. At March 31, 2002, the outstanding balance
was $92,102 under the warehouse line of credit. Term funding of $292,080 was
entered into during 2001 through the issuance of collateralized notes in a
private placement of which $286,483 is outstanding at March 31, 2002.
Since Sky Financial is a holding company and does not conduct operations, its
primary sources of liquidity are borrowings from outside sources and dividends
paid to it by its subsidiaries. For the banking subsidiary, regulatory approval
is required in order to pay dividends in excess of the subsidiary' earnings
retained for the current year plus retained net profits for the prior two years.
As a result of these restrictions, dividends that could be paid to Sky Financial
by its bank subsidiary, without prior regulatory approval, was limited to $8,647
at March 31, 2002.
On March 6, 2002, Sky Financial renegotiated an agreement with unrelated
financial institutions which enabled Sky Financial to borrow up to $120,000
through March 5, 2003. At March 31, 2002, Sky Financial had borrowings of
$80,000 under this agreement.
Asset/Liability Management
Closely related to liquidity management is the management of interest-earning
assets and interest-bearing liabilities. Sky Financial manages its rate
sensitivity position to avoid wide swings in net interest margins and to
minimize risk due to changes in interest rates. At March 31, 2002, Sky Financial
had a manageable negative gap position and therefore does not expect to
experience any significant fluctuations in its net interest income as a
consequence of changes in interest rates. See also Item. 3, "Quantitative and
Qualitative Disclosures About Market Risk."
Forward-Looking Statements
This report includes forward-looking statements by Sky Financial relating to
such matters as anticipated operating results, credit quality expectations,
prospects for new lines of business, technological developments, economic trends
(including interest rates), reorganization transactions and similar matters.
Such statements are based upon the current beliefs and expectations of Sky
Financial's management and are subject to risks and uncertainties. While Sky
Financial believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could prove
to be inaccurate, and accordingly, actual results and experience could differ
materially from the anticipated results or other expectations expressed by Sky
Financial in its forward-looking statements. Factors that could cause actual
results or experience to differ from results discussed in the forward-looking
statements include, but are not limited to: economic
conditions; volatility and direction of market interest rates; capital
investment in and operating results of non-banking business ventures of Sky
Financial; governmental legislation and regulation; material unforeseen changes
in the financial condition or results of operations of Sky Financial's
customers; customer reaction to and unforeseen complications with respect to Sky
Financial's restructuring or integration of acquisitions; difficulties in
realizing expected cost savings from acquisitions; difficulties associated with
data conversions in acquisitions or migrations to a single platform system; and
other risks identified from time-to-time in Sky Financial's other public
documents on file with the Securities and Exchange Commission. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements, and the purpose of this paragraph is to secure the
use of the safe harbor provisions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk that a financial institution's earnings and capital, or
its ability to meet its business objectives, will be adversely affected by
movements in market rates or prices such as interest rates, foreign exchange
rates, equity prices, credit spreads and/or commodity prices. Within Sky
Financial, the dominant market risk exposure is changes in interest rates. The
negative effects of this exposure is felt through the net interest margin,
mortgage banking revenues and the market value of various assets and
liabilities.
Sky Financial manages market risk through its Asset/Liability Committees (ALCO)
at both the subsidiary and consolidated levels. These committees monitor
interest rate risk through sensitivity analysis, whereby it measures potential
changes in future earnings and the fair market values of its financial
instruments that may result from one or more hypothetical changes in interest
rates. This analysis is performed by estimating the expected cash flows of Sky
Financial's financial instruments using interest rates in effect at March 31,
2002 and December 31, 2001. For the fair value estimates, the cash flows are
then discounted to year end to arrive at an estimated present value of Sky
Financial's financial instruments. Hypothetical changes in interest rates are
then applied to the financial instruments, and the cash flows and fair values
are again estimated using these hypothetical rates. For the net interest income
estimates, the hypothetical rates are applied to the financial instruments based
on the assumed cash flows. Sky Financial applies these interest rate shocks to
its financial instruments up and down 200 basis points.
The following table presents an analysis of the potential sensitivity of Sky
Financial's annual net interest income and the present value of Sky Financial's
financial instruments to sudden and sustained 200 basis-point changes in market
rates.
March 31, December 31,
2002 2001 Guidelines
- ---------------------------------------------------------------------
One Year Net Interest
Income Change
+200 Basis points (3.28)% (.2)% (10.0)%
+100 Basis points 1.79 (.03) (5.0)%
-100 Basis points (4.00) (.27) (5.0)%
The projected volatility of net interest income and the net present value of
equity rates to a +/- 200 basis points change at March 31, 2002 and December 31,
2001 fall within the ALCO guidelines.
The preceeding analysis is based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and reactions of depositors to
changes in interest rates, and should not be relied upon as being indicative of
actual results. Further, the analysis does not necessarily contemplate all
actions Sky Financial may undertake in response to changes in interest rates.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Sky Financial is, from time-to-time, involved in various lawsuits and claims,
that arise in the normal course of business. In the opinion of management, any
liabilities that may result from these lawsuits and claims will not materially
affect the financial position or results of operations of Sky Financial.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of Sky Financial Group, Inc. held April
17, 2002, ballot totals for the election of five (5) Class I Directors to serve
a three-year term until the Annual Meeting of Shareholders in 2005 were as
follows:
Class I Directors
Term Expires 2005 FOR WITHHELD
- ---------------------------------------------------------------
Marty E. Adams 65,896,411 916,434
Jonathon A. Levy 65,858,936 953,909
Thomas J. O'Shane 65,627,378 1,185,467
Edward J. Reiter 65,992,354 820,494
C. Gregory Spangler 65,728,840 1,084,005
Total shares voted were 66,812,845 or 81.04% of the outstanding shares.
The following incumbent Class I and Class II Directors who were not nominees for
election at the April 17, 2002 Annual Meeting were as follows:
Gregory N. Chandler II James C. McBane
Robert C. Duvall Gregory L. Ridler
D. James Hiliker Emerson J. Ross, Jr.
Richard R. Hollington, Jr. Robert E. Spitler
Fred H. Johnson III Joseph N. Tosh II
Gerard P. Mastroianni
At the Annual Meeting of Sky Financial Group, Inc. Shareholders on April 17,
2002, ballot totals for the approval and adoption of the 2002 Stock Option and
Stock Appreciation Rights Plan were as follows:
FOR 47,828,659
AGAINST 6,442,595
ABSTAIN 1,064,355
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11.1) Statement Re Computation of Earnings Per Common Share
(b) Reports on Form 8-K
Sky Financial filed a report on Form 8-K with the
Securities and Exchange Commission as of May 7, 2002,
announcing that it had entered into an Agreement and Plan
of Merger with Three Rivers Bancorp, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SKY FINANCIAL GROUP, INC.
/s/ Kevin T. Thompson
Kevin T. Thompson
Executive Vice President / Chief Financial Officer
DATE: May 15, 2002
SKY FINANCIAL GROUP, INC.
EXHIBIT INDEX
Exhibit No. Description Page Number
(11.1) Statement Re Computation of Earnings
Per Common Share
The information required by this exhibit
is incorporated herein by reference from
the information contained in Note 7
"Earnings Per Share" on page 11 of Sky
Financial's Form 10-Q for March 31, 2002.